In Depth with Eira Thomas, New CEO of Lucara Diamond Corp.

04/04/2018 15:05

Eira Thomas was recently appointed as the new CEO of Lucara Diamond Corp., replacing William Lamb, who oversaw the successful creation of the world-class Karowe mine in Botswana. Thomas brings more than 25 years’ experience in the mining industry to Lucara, including 16 years with Aber Diamond Corporation (now Dominion Diamond), where she played an integral role as a geologist at its initial discovery and ultimately became Director of the Board.

She was co-founder of Stornoway Diamond Corp., serving as CEO and then as Executive Chairman, leading the acquisition of the Renard diamond deposit. In 2007, she founded Lucara with Lukas Lundin and Catherine McLeod Seltzer. Eira Thomas most recently served as CEO of Kaminak Gold Corporation, which was acquired by Goldcorp in 2016 for $520 million. She is also a director of Suncor Energy. We caught up with her in Antwerp to talk about her new role as CEO of Lucara, and about Lucara’s acquisition of Clara Diamond Solutions, a digital sales platform for rough stones that promises to transform the way rough diamonds are transacted.

The Diamond Loupe (DL): You were one of the original founders of Lucara back in 2007. Does this appointment seem like a homecoming of sorts?

Eira Thomas (ET): It is, to a certain degree. Having said that, I have been involved in the company since day one and have served on the Board of Directors since 2012. But to be back on this side of the table as CEO is an exciting opportunity at this point in my career. I feel like many of the experiences I have had in the last 25 years have been in preparation for taking on this role at Lucara at this particular stage in its history. It is going to be a new challenge and one that I am very much looking forward to.

The transition

DL: Tell us about taking over from William Lamb, who has been the face of Lucara for more than a decade.

ET: As you say, William has been in this role for a decade, and if you know William, you know he is a very energetic individual. He doesn’t take anything on at half speed. Everything he does is with conviction and tremendous commitment. We are  proud of his many achievements, including building the mine on time and on budget, as well as implementing his vision for an innovative mine design incorporating XRT technology and autogenous milling. It was not something we necessarily anticipated, but when William said he wanted to take some time out to re-charge and reevaluate what his next career challenge should be, we completely understood.

Because my gold venture, Kaminak, had been sold to Goldcorp 18 months earlier, I was approached by the Board of Lucara and asked if the CEO role at Lucara was something I would be interested in doing. And, of course, my immediate answer was ‘yes’, though I had already been going down a different path with Clara (Diamond Solutions), a private company that I was planning to launch with an initial public offering in 2018. We took a hard look at what Lucara needed going forward and that is how we ended up with the concept of putting these companies together, recognizing that there were potential synergies between them.

Matchmaking: Clara and Lucara

DL: You mentioned elsewhere that Clara represents a growth opportunity for Lucara. Could you explain?

ET: Even though Clara is not a mining opportunity, it is a diamond opportunity, and it represents an important avenue of growth for Lucara.  Finding the right avenue for growth at Lucara is something we have struggled with. Diamond mines are rare, and when you have a mine like Karowe, which is one of the world’s highest margin diamond mines, it is difficult to identify other, low risk, accretive diamond mining opportunities that not only provide us with future growth, but also support and help us to grow our dividend. Lucara was the first diamond mining company to pay a dividend and we believe this is an important investment differentiator. 

Clara represents an affordable, potentially high value growth opportunity that is compatible with our core diamond mining business and does not impact our ability to pay a dividend. We were able to purchase Clara in an all-share transaction that resulted in less than a 3.7% dilution to our overall share capital, and it will require a very limited amount of capital to commercialize and sustain it going forward.  Our view is that Clara could generate a significant amount of future revenue which far outweighs the risk in dilution that we took to acquire it.

The acquisition of Clara is also consistent with our reputation of being an industry leader in innovation, using technology to create efficiencies and unlock value throughout the value chain. For Clara, it is a benefit to be able to commercialize the platform using diamonds from the Karowe diamond mine. 

Transforming how we sell diamonds

DL: How did you get involved with Clara, and what is your vision for it?

ET: A private group brought the project to me many months ago, convinced I could be the right sponsor. I was intrigued by the idea and undertook my own due diligence, which included engaging specialists in digital technologies.  Fundamentally, Clara is a business solution for the diamond industry that has emerged from the manufacturing side of the diamond trade and was born out of a frustration with the way manufacturers currently have to source the rough diamonds they need to supply their polishing businesses. Clara has widespread benefits throughout the value chain, however, and offers a value proposition to producers as well. That’s the beauty of it. It is really about modernizing how we sell diamonds to the broad benefit of all.

We have been selling diamonds the same way for over a hundred years. It really hasn’t changed. Because all diamonds are unique, and have individual price points, the prevailing wisdom is that, as a producer, if you want to sell your production in volume, for predictable revenues at regular intervals, you have to batch rough diamonds together into assortments. Those assortments are bought by your first order customers who will manufacture a portion of those goods, but invariably these assortments will include diamonds they cannot manufacture profitably, and which they will have to sell on secondary markets or hold in inventory. It is estimated that as much as 75% of of the diamonds sold by producers to primary customers may end up in the secondary market.

As a push system, these secondary and tertiary markets are inefficient, and value is being lost at each stage. With Clara, we are proposing to sell stones produced from a mine on an individual, stone-by-stone basis, on the basis of manufacturers’ polished orders, ultimately transforming this 100-year old push system into a pull system.

The Smartie analogy: everybody wins

DL: You will have to explain this, because this is what I think people do not quite understand.

ET: I often use the analogy that buying diamonds is similar to buying smarties once a month. Anyone can go to their local corner store and buy a box of smarties for a predictable price.  Further, you know generally and with confidence what you are going to get when you buy your box of smarties: a set amount of quality, round, candy covered chocolates. But, until you make your purchase and open the box up, you don’t know exactly how many pinks, greens, yellows or reds are contained in the box for that month.  What’s more, month to month, colors in that box will vary. For example, one month I may find that I have all the blues I need, but I am short on pinks and I have a whole bunch of greens I can’t do anything with, so I have to sell those on. And, because I am short on the pinks I need for my factory, I now need to go in search of more smartie boxes to purchase.

You end up purchasing volumes of goods you cannot use in order to secure the goods you need, and then spend a lot of time and effort and, quite frankly, money, disposing of those goods. With Clara, you will be buying individual smarties. You no longer have to buy a whole box; just the ones you want. Our test trials have demonstrated that when producers sell individual rough diamonds and manufacturers are able to buy individual diamonds, we can unlock 18-23% of incremental value throughout the entire pipeline. Producers get more for their rough, and manufacturers achieve better margins on the polished they ultimately produce. Additionally, they can afford to pay more for the rough they source because they no longer have to purchase goods they cannot use.

What’s more, we predict that having a system that provides an avenue to locate and regularly source different types of rough is going to drive a tremendous amount of innovation in manufacturing and beyond, into retail sales, creating a number of new opportunities that we have not yet even conceived of. 

Who’s afraid of a digital marketplace?

DL: Traders have voiced concerns about the impact such a system might have on the secondary market. Is their anxiety of being cut out unfounded?

ET: It is like all innovation. There are those that resist it and those that embrace it, and it is our view that those who embrace it are going to position themselves to benefit. Changes to the system are inevitable. The way we have been selling diamonds does not make sense in the world today, where we have technology to assist in the whole process to make it more efficient. As one example, Clara will facilitate diamonds sales in real time rather than in sales cycles every five weeks, helping to eliminate inventory carrying costs.

Clara will not eliminate anybody in the value chain specifically, but certain areas of the value chain will be impacted more than others and the more marginal players will become vulnerable. For example, there is nothing to prevent a secondary trader from taking their goods and selling them on Clara. In fact, we would argue this would be a logical thing to do, and that they can make more money by doing so. Clara will also spur new innovation in the industry. Niche manufacturers, for example, will be able to provide services on Clara to those customers that do not have manufacturing facilities. That is just one potential spin-off, and we see many others as well. Does this mean everybody is going to thrive in Clara? No. But by getting rid of marginal players, we aim to provide stability to the overall marketplace.

It is also important to understand that we are not proposing to eliminate the traditional way of selling diamonds overnight, rather, we see the two systems running in parallel. We think there is likely to be broad early adoption, but we are focused on goods between 1 and 15 carats in size, in the better qualities and colors. There will still be an important role for tenders – and most certainly for Karowe where the preponderance of large +10.8 carat diamonds will not be ideally suited to a platform like Clara. Small goods probably do not make sense on Clara either, so large volumes of production in the value chain are not going to be impacted by Clara.

DL: To what extent is this about traceability?

ET: Other producers have talked a great deal about this. De Beers and Dominion and ALROSA are talking about blockchain systems to help provide assurance on provenance from mine right through to retail. That is just an added benefit of Clara. Clara is fundamentally a business solution, but it is ideally suited to the application of blockchain and as such, we will also be able to provide assurance on provenance, which is important and something that increasingly, we believe, consumers are looking for. Blockchain is the enabler. It is the platform that allows Clara to run with integrity and security.

Unlocking value

DL: You recently said in an interview that you could anticipate the earnings for this project eventually matching that from your mining activities. Could you walk us through that?

ET: No, I can’t [smiling, but serious]. We have been deliberately vague about that to a certain extent because we are in the process of commercializing it. Suffice it to say we would not be doing this unless we believed there was a big prize for us at the end of the day. As we get closer to launch date, we will start talking about the actual revenue model in greater detail.

What I will say about our current revenue model is that we do not plan to charge a high fee to use it. The concept is that manufacturers will upload their polished orders and what they are willing to pay for those polished goods; producers will upload their individual rough diamonds and what they are willing to sell them for. Clara will find the match between the producer and the manufacturer and, to the extent there is a spread between buyer and seller, Clara will get a portion of that. That is more or less where the current revenue model is aimed. It is not a fee-based structure; it is about taking a portion of the unlocked value. 

DL: Do you have a timeframe for its launch?

ET: We hope to start transacting diamonds from Karowe through the platform in August 2018. As we get closer, we will start communicating further details. We have a partner in Vancouver that is one of Canada’s largest digital business solutions consultancies. When I first showed them this project they were quite perplexed. They looked at it and said to me, “Do you mean this isn’t the way diamonds are already being sold?” And I said, “no, it is not.”

A true supply & demand marketplace

DT: Who will be able to use the system? Are you thinking about junior miners?

ET: Absolutely. Though discussions with peer companies are still in the early stages, junior miners have shown the highest level of interest so far. Because selling diamonds on Clara does not require a big, up-front capital investment, we will be suggesting that producers simply try selling a portion of their diamonds through Clara to demonstrate that they can actually achieve better prices.

DL: One concern could be that manufacturers go straight to the producers and eliminate the need for tender houses, thinking they can get the assortment they want without middlemen facilitating their purchases. Is this valid?

ET: We do not envision an elimination of the tender houses at all. We see these systems running in parallel, because not every diamond will qualify for sale on Clara, at least initially. Ten years ago, tendering did not exist; today it has become an important sales mechanism for the independent producers and public companies. It is our view that businesses that add value will not disappear as a result of Clara. Rather, it is more likely that Clara will drive opportunities for collaboration. There are no specific barriers to who can purchase on the Clara system or who can qualify. Use of the blockchain will help govern participants and will eliminate bad actors.

Another positive opportunity with Clara is to create a more stable and harmonized marketplace between rough and polished, reducing timelines and increasing transparency.  In the world of Clara, sales will happen in real time and all participants will have much more certainty and predictability.

Meanwhile, back at the mine

DL: This past year, revenue was down, production and sales volumes were down 100,000 carats each, your cost of production rose due to problems with your new mining contractor, and are expected to be high again in 2018. Your share price has fallen about 30% since the end of 2016. How are your investors feeling? Do they still have confidence in your plan going forward? 

ET: The entire industry faced some pretty serious headwinds in 2017. Prices were lower and overall it was a challenging environment. Yes, Lucara is significantly off our 2016 highs, but so too is every other producer. Lucara’s underperformance in 2017 was in large part owing to the fact that we changed mining contractors and had poor equipment availability in the open pit, which meant that we had to process ore from our lower grade stockpiles. Though our carat production was down, we were able to chase value and ultimately achieved high average diamond prices in 2017, consistent with those achieved in 2016 (US $849, vs US $847).  Moreover, our revenues and earnings per share were also consistent year over year.

Costs were up as a result of a planned waste-stripping campaign to access the high value south lobe ore in support of open pit mining over the next eight years. We expect to be through the bulk  of this waste stripping exercise by the latter part of 2018, after which point, we will see our costs start to come down.

Going underground

DL: How are your various expansion projects progressing?

In 2017 we completed all of our capital projects for enhanced diamond recovery on time and on budget.  These projects included the Mega Diamond Recovery circuit (to allow for the recovery diamonds up to 5,000 carats in size) and the Sub Middles XRT circuit (to remove yield constraints observed in the deeper south lobe ore). In addition, we completed a positive preliminary economic assessment which examined the economic potential of going underground at Karowe after 2026. In response to this positive PEA, the company initiated a pre-feasibility study for the Karowe underground, which is now underway and is expected to be completed in late 2018. In support of that study, Lucara will be announcing an updated resource estimate in Q2, 2018, and we will also complete geotechnical and hydrogeological studies before year end.  In addition, deep drilling from 2016 and 2017 expanded the volume of the EMPK(S) kimberlite at depth, which could also have further positive implications for the underground economics as this unit appears to be higher grade.

DL: You also have the AK cluster and BK02 licenses. If sampling from those studies turns out positive, would you be looking to develop them yourself?

ET: Absolutely. We have good facilities, including a bulk sample plant on site at Karowe and we are continuing to run bulk samples from those additional mining licenses. So far we have not identified any economic orebodies, but these things take time. We are also continuing to look at other exploration opportunities in the area; we obviously like Botswana and would very much like to have another mine in Botswana.

DL: Last question: you are a single mom. How do you do that?

ET: That’s a really good question. The last few weeks since the announcement have been pretty unusual in terms of travel. But my kids are now at an age where they understand I am taking on a big new job, and that it is important that I get out and see all my stakeholders, whether it be the communities in which we are working in Botswana, the shareholders, or our diamond community here in Antwerp. It has been good to get out and explain what we are doing and re-introduce myself to this community, and at the same time to get really familiar with all aspects of the company that are going to be really important going forward. I am hoping April will be a quieter month, which will be good, and then I am going to bring them along with me. They are pretty adventurous. The last few years has been mostly Yukon, so this will be a very different experience – Africa and Europe. But I think it is great for them to have the opportunity to see the world and to understand a little bit about what I do.